Editors note: China’s subsidies continue in the form of buying equity stakes in private businesses, rather than let companies go bankrupt like they would here.
Government-linked investors are knights in shining armor for cash-starved private enterprises
[Shen Hong | September 30, 2019 | WSJ]
However, while President Xi Jinping has centralized control more than his predecessors, the purchases appear to be driven by the desire to maintain stability rather than a deliberate strategy to weaken the private sector. In October, Mr. Xi sought to reassure businesspeople, saying: “Any word or act to deny or weaken the private economy is wrong.”
Huang Shuishou, a 72-year-old businessman dubbed the country’s “king of plastic film” by local media and others including domestic official trade organizations, is among the entrepreneurs selling stakes to alleviate financial difficulties.
Starting with a printing factory in a small town in eastern Zhejiang province, he built a packaging empire, expanding in part by devouring struggling state-run rivals. His Shenzhen-listed unit, Zhejiang Great Southeast Co., makes plastic packaging for products including lithium batteries.
But the publicly traded business has been unprofitable in recent years and in June, Mr. Huang’s holding company sold its entire 27.9% stake in the listed company for 1.2 billion yuan ($168.5 million). The buyer: his hometown water utility, state-owned Zhuji Water Group Co.
The deal helped the holding company repay loans for which it had pledged more than two-thirds of its shares in Zhejiang Great Southeast as collateral. Mr. Huang didn’t respond to requests for comment.
Beijing is stepping in because they are worried about a sharp rise in unemployment.
—Andrew Collier, managing director at Orient Capital Research
In total, state-backed buyers bought 47 stakes in listed private companies from January through June, according to Fitch Ratings. That compares with 52 deals in all of 2018.
The figures include purchases by state-run companies and investment vehicles of local governments, and stake sizes range from less than 1% to 100%.
This full year is likely to set a record, said Jing Yang, a Shanghai-based analyst at the credit ratings company. “The majority of these stake acquisitions need to be understood from the perspective of relieving financial stress,” she said.
The Fitch figures probably don’t capture the full size of the state’s stepped-up involvement. From October 2018, local authorities and state-linked entities quickly put together about $100 billion of “relief funds” to aid private companies, according to a January estimate from TF Securities.
These funds are intended primarily for passive investments, whereas state-owned enterprises, or SOEs, are more likely to take a hands-on role if they buy into nonstate companies.
TF said the funds could be used for all kinds of deals, including buying shares, extending loans, undertaking debt-for-equity swaps, and buying shareholders out of stock positions that are pledged for loans. Not all such deals would show up in mergers data.
Authorities are acting after failing to persuade banks to lend more to riskier private borrowers, said Andrew Collier, Hong Kong-based managing director at Orient Capital Research. “Beijing is stepping in because they are worried about a sharp rise in unemployment,” he said.
China’s private sector remains pivotal to the health of the world’s second-largest economy, providing close to 60% of all urban jobs in 2017, up from 35.6% in 2010, according to Oxford Economics.
Private firms in China find it hard to borrow from banks, and have relied heavily on alternative funding. So they have been hurt by a campaign against financial risk, which has especially targeted shadow-banking instruments such as trust loans. A stock market selloff last year also created a crisis because many entrepreneurs had pledged their shares in listed companies as collateral for loans.
Reforms have also hurt. In 2015, Beijing launched “supply-side” reforms to reduce industrial overcapacity. That effort and a simultaneous antipollution campaign wiped out many smaller mining companies and refiners.
Reflecting the gloom, a China business confidence index compiled by the Cheung Kong Graduate School of Business fell to 47.2 in August. The index, which uses a similar method to a purchasing managers index, is forward-looking and a reading below 50 indicates respondents expect conditions to worsen.
For some state-backed acquirers, the purchases could be a quick route to going public. Beijing wants more utilities, in particular, to list shares. Buyers could inject some of their assets into the publicly traded companies they now have partial control over, as a way to carry out a backdoor listing. Zhuji Water Group said one reason for buying into Great Southeast was to “expand fundraising channels.”
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